By Sam Seiden, Online Trading Academy Director of Online Education
I have been in the business of trading and trading education for many years. The most fascinating part of money and markets for me is witnessing how the masses around the world "think" the markets. I guess a more accurate way to describe it would be to say "miss-think" the markets. What the average person who gets involved in trading or investing does not understand is that for the most part, they already know how to properly buy into markets before ever opening an account or reading a book on proper trading or investing. There is a perception that proper trading and investing is somehow different than how you properly buy and sell things in everyday life.
Let's use one of my favorite foods as an example. As with most products in the produce section of the grocery store, price fluctuates; it's all about supply and demand. During a week's time, let's say that the price of Avocados changes three times as you can see below. If you are someone who buys Avocados on a regular basis (or anything at the grocery store), you are likely to take the following action according to price. If $1.00 is the average price you pay for one Avocado and they are selling for $1.00 each, you will likely buy your normal amount. If they are selling at $0.50 each, you will probably buy as many as you can. Maybe you will eat a couple more than usual and give the rest to your mother-in-law (have to keep her happy). If, however, you roll your shopping cart up to the Avocados and notice that they are selling for a whopping $3.00 each, you are likely to buy no more than what you need and you may not buy any at all. Unless of course you are in hot water with your mother-in-law, then you still have to buy at least one.
Monday: $0.50 each |
Monday: $1.00 each |
Monday: $3.00 each |
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Figure 1
This is simple logic that we all use in our everyday life when we buy food, cars, clothes, homes, and so on. Why is it then that when most people make decisions on buying and selling in the world of trading and investing, their action is almost 100% opposite of the Avocado example? You would never walk up to the checkout counter and say, "I know the Avocado's are $1.00 each but they were so tasty last week, I want to pay you $4.00 each for them." When it comes to the average investor's thought process, they are not looking for a "deal" or a "sale" and so on. They are not interested buyers unless the economy is in good shape, earnings are good, and there is a healthy uptrend underway.
What they fail to understand is that when all of those items are "good," market prices are high. Therefore, if you buy when price is high, who will buy from you? This is the trap that drains hard-earned investment capital out of the accounts of the ill-informed thinkers and quickly transfers those funds to the reality based thinkers. Remember, when we buy, others have to buy after us at higher prices if we are to profit; there is no other way to profit. This unfortunate market action which the majority of the investing public takes is exactly the same as waiting for the Avocados to double in price, and then being an interested buyer.
It all comes down to proper perceptions created in that six-inch space between your ears. Each morning, most of us wake up, go to the bathroom and begin the morning routine. Part of that routine includes looking in the mirror. What we focus on during that one-on-one mirror time with ourselves is appearance. The next time you are in front of that mirror, look deeper than your skin and realize that behind that complexion lies the perception generator that will determine your strategy for either attaining wealth and lifelong financial security, or losing it to someone who understands how to properly "think" the markets; this is so important! Next, understand that you have the power to control your perceptions of how things really work. Proper perceptions, however, always begin with proper thoughts. My goal with today's piece is for you to understand a simple fact: The simple logic and rules you use when buying things in everyday life that make you a smart buyer at the grocery store, for example, are exactly what will make you a profitable market speculator.
Below, I took a picture of the XLT during our live pre-market analysis session. During this session where we prepare for the day and week ahead, the NASDAQ happened to be opening down from the prior day's close (see black arrow). It was a gap down in price on some bad news. This means that the masses were aggressively selling because the perception was that bad news meant price was going lower. Even though price was gapping DOWN, the masses were willing sellers at lower prices.
Extended Learning Track (XLT), Stock Trading Session August 19th
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Is this how these same masses of market speculators buy and sell in other parts of their lives? Of course not. If these people who sold the NASDAQ at such low prices were the producers of Avocados, they would not be aggressively selling Avocados at lower prices. They would not even be interested in producing Avocados if price was too low. The smart Avocado seller sells as many as he or she can at higher prices. In this NASDAQ example, the Avocado seller was not interested in selling when price was high; they waited until price was low, and this makes no sense. However, when these same people invest in the markets, they are fine with selling at low prices. This is because they have put trading / investing in the markets and how you buy and sell everything else into two separate thinking categories and this is where the illusion lies. This illusion is the number one reason for the transfer of wealth from those who don't properly think the markets, into the accounts of those who do. The reality was that price was gapping down to a price level where demand exceeded supply. This is no different than the Avocados briefly selling for $0.50 each; of course there will be a ton of buyers (demand) who will buy them up very fast. Quickly, there will be no more Avocados for sale at that price level. Our pre-market analysis had us buying into the stock market that morning as the buying opportunity was low risk, high reward, and very high probability. As you can see, that buying opportunity worked very well for us as price rallied dramatically from that demand level. Those who sold to us that morning did not fare that well. I bet some of those gap - down sellers who lost money that morning in the markets ended up at the grocery store later that day and properly looked for good products on sale. It's almost like multiple personalities - amazing.
The next time you are talking to your stock broker, financial advisor, or making a trading or investing decision on your own, pretend you're talking to a car salesman. Do your best to get the lowest price you can when buying and the highest price you can when selling. As for me, I will do my part to keep the Avocado producers in business. I know they are loaded with fat but it's the good, healthy fats. Lastly, would you believe that there are many people that call my line of thinking the markets "contrarian?"
Yes, it's true. I get some emails and also talk to some people at events that ask me if my strategy is contrarian. My answer to them always has two parts. First, this is not my strategy; it's no one's strategy. This is how every smart buyer and seller of anything buys and sells. As for supply and demand, Adam Smith doesn't even own that; it's been here forever. Second, some people call my market and trading concepts contrarian simply because the vast majority of people have a thought process with money and markets that is simply wrong. So, because the minority is correct, our line of thinking is considered contrarian. Fine with me...
Hope this was helpful. Have a great day.
- Sam Seiden sseiden@tradingacademy.com
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